In my work as a Consulting CFO, the conversation I have most often with leadership teams is not about whether compensation costs are too high. It is about whether the compensation model the company is operating still fits the business the company has become.
Many of the financial models I review were built years ago, for a different stage of growth, a different cost structure, and a different talent market. They worked then. They will not work for what comes next. Redesigning to be sustainable is a key feature of remaining a viable competitor.
Compensation Is Capital Allocation
Total Rewards is one of the largest deployments of capital a company makes each year. Yet it is rarely modeled with the same rigor we apply to revenue or margin. Workforce planning happens in HR systems. Financial planning happens elsewhere. Leadership teams end up without a single, integrated view of resource investment and return.
When I sit down with a CFO or CEO to redesign Total Rewards, the first question is always the same: what behaviors and outcomes are we paying for? If the leadership team cannot answer that cleanly, no amount of benchmarking will produce a model that drives the business forward.
The Three-Tier Structure, From a Financial Lens
The three-tier model (Corporate, Group, Individual) works because each tier connects to a different financial reality, and together they create shared accountability across the business.
Corporate Tier
Tied to overall P&L results versus budget or forecast. This is where shared exposure lives. When the company wins, everyone shares in it. When it falls short, everyone feels it. From a financial discipline standpoint, this tier is what keeps the model honest. It connects every employee to the same definition of success.
Group or Team Tier
Measured by gross or direct margin: the revenue the group generates after its direct costs. Targets are defined by group leadership and approved by the C-Suite. This layer is the one most often missing in client compensation models. Without it, business unit performance gets lost inside the company’s overall numbers. A division that outperforms carries no extra weight. A division that underdelivers carries no extra accountability.
Individual Tier
Personal targets that are measurable, achievable, and within the employee’s own control. From a modeling perspective, this tier is where most plans break. Targets that depend on factors outside the employee’s control do not motivate behavior. They generate disengagement.
Modeling Discipline Is Non-Negotiable
An effective Total Rewards strategy is grounded in financial reality. Bringing finance leaders in early is critical, because rewards affect labor costs, margins, cash flow, scalability, and long-term sustainability. Modeling, not guessing, ensures the rewards system is affordable now and in the future, supports organizational goals, and avoids turning well-intentioned rewards into liabilities.
With many of our clients, the financial model they built years ago will not be sustainable with some of the Total Rewards cost increases now in motion. Re-designing to be sustainable is a key feature of being a viable competitor.
The Stretch Tier
I am a strong advocate for building a stretch tier into the corporate and team components. A payout premium at 105 or 110 percent of budget can be a powerful motivator when the targets are credible and the math is clear. Stretch incentives give high performers a tangible reason to push further. Without a ceiling on reward, there is no ceiling on effort.
The discipline is this: the stretch payout must be modeled into the financial plan. If a company hits 110 percent of budget, the additional cost has to be absorbable inside the additional margin. Stretch incentives only work when the math is built to handle them.
The Questions Every Executive Should Be Able to Answer
If the executive team cannot answer these three questions, the Total Rewards model needs a redesign:
- What behaviors and outcomes are we paying for?
- What return are we getting from our labor investments?
- Where are we overspending or under-investing?
The Bottom Line
An aligned Total Rewards model links costs to value creation. It rewards roles and skills that drive growth, reduce risk, and strengthen the business. Done well, it is the most disciplined capital allocation decision a CFO can support. Done poorly, it is the most expensive mistake on the P&L.
Kristy Facchini
Consulting CFO, PBO Advisory
[email protected]
(858) 622-1681
Is your Total Rewards plan the strategy execution plan your business needs, or the historical artifact it has inherited?
PBO Advisory Group partners with CEOs and their executive teams to redesign Total Rewards programs that move compensation from the expense column to the investment column. Our integrated approach aligns finance, human capital, and strategy so every dollar of Total Rewards earns a measurable return.
